Question

Base Rate is the interest rate below which
1. Scheduled Commercial Banks (SCBs) would not lend to consumers
2. SCBs would not borrow from RBI
3. RBI would not lend to SCBs
4. SCBs cannot give interest for the public bank deposits

Answer 1

Correct Answer - Option 1 : Scheduled Commercial Banks (SCBs) would not lend to consumers

The correct answer is Scheduled Commercial Banks (SCBs) would not lend to consumers.

• It is like the Prime Lending Rate (PLR) and the Benchmark Prime lending Rate (BPLR) of the past and is basically a floor rate of interest. It replaced BPLR in 2010.
• Base Rate system is aimed at enhancing transparency in lending rates of banks and enabling better assessment of transmission of monetary policy.
• This was because, in the earlier system, banks could lend below BPLR.
  • This allowed bargaining by the borrower with the bank.
  • So, ultimately one borrower was getting a cheaper loan than the other and blurred the attempts of bringing in transparency in the lending business.
• For the same reason, it was also difficult to assess the transmission of policy rates (i.e. repo rate, the reverse repo rate, bank rate) of the Reserve Bank to lending rates of banks.